Header Menu

Back in July we posted "What Keeps Mario Draghi Up At Night, And Why The European Depression Has A Ways To Go" in which we presented "Europe's annual change in M3, alongside the far more important bank lending to the Euro area private sector. It is the latter which [then had] just dipped to a record low, indicating once more that Europe's monetary transmission mechanism is not only clogged up (a rising M3 should have a favorable impact here) but hopelessly broken. In other words, it is the brown line in the chart below that is what is giving the ECB chairman nightmares, and is leading to such secondary effects as record high unemployment and negative GDP growth virtually across the entire Eurozone." Needless to say, in a Keynesian a world in which credit growth and only credit growth leads to economic growth (see Ray Dalio for more), and in which the ECB is a net extractor of liquidity (and thus debt), this means that the European depression will simply get worse as soon as the current episode of foreign capital flows tapers out and the "current account" injectors realize that it was nothing but another case of greater fool risk-chasing in Europe.

Moments ago Mario Draghi's nightmare just got worse following a release by the ECB overnight that loans to the private sector dropped 2 percent from a year earlier. That’s 16th monthly decline and the biggest since the start of the single currency in 1999. "The data shows a depressing picture for the credit market," said Annalisa Piazza, an analyst at Newedge Group in London. "Although the ECB made clear that the ECB cannot do much to boost credit to the corporate sector, we expect the current picture for loans to remain one of the key reasons behind expectations of a prolonged period of accommodation."

And here is how the chart that keeps Mario Draghi up at night looks like for today's update:

SocGen's commetary:

Loan production to the private sector growth dropped further by €8bn or 1.5% yoy (after sales and securitisation adjustment). Looking forward, this suggests that a recovery in private investment at the area level is not something to expect in the near future. Moreover, this weakness in monetary dynamics, combined with a likely appreciation of the euro implies that inflation pressures will remain subdued for some time.

Looking ahead, we expect money supply growth to remain subdued, slightly above 2.0% yoy. Private-sector credit growth, however, remained negative in August, falling by 2.0% yoy. Adjusted for sales and securitisation, private-sector loan production dropped by €8bn, after respective tumbles of €35bn and €44bn in July and June. Loan production to the private sector stood 1.5% below its year-ago level in August (after sales and securitisation adjustment).

Once again, the ECB’s report showed a big divergence across sectors and countries. Indeed, loan production to non-financial corporates plunged by €11bn in August (2.9% yoy), after respective €19bn (2.1%yoy) and €12bn (2.3%) drops in July and June. This suggests that a recovery in business investment is unlikely to happen inQ3. Credit to the private sector of peripheral countries did not show any sign of recovery (see accompanying chart).

And some more nightmare charts from Goldman:

Basically, all monetary transmission mechanisms in Europe are completely broken, which in turn feeds the feedback loop of the deleveraging depression, leading to even less demand for loans, more deleveraging by banks ad lib. But at least the ECB has its imaginary, non-existant OMT to keep everyone at bay, for now, or else all hell breaks loose if and when market participants dare to finally pull their heads out of the sand (or other less conveient locations).